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Supreme Court case could have tax consequences for same-sex couples

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The outcome in the U.S. Supreme Court case challenging the 1996 Defense of Marriage Act could have complicated tax consequences for same-sex couples, says Richard L. Kaplan, the Peer and Sarah Pedersen Professor of Law at the University of Illinois, an expert on taxation and retirement issues.

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3/21/2013 | Phil Ciciora, Business & Law Editor | 217-333-2177; pciciora@illinois.edu

CHAMPAIGN, Ill. — The resolution of a U.S. Supreme Court case challenging the 1996 Defense of Marriage Act could have complicated tax consequences for same-sex couples, a University of Illinois expert on taxation and retirement issues says.

On Wednesday (March 27), the U.S. Supreme Court will hear oral arguments in a historic case defining the scope of marriage, a decision that could have enormous legal implications – including the prospect of many same-sex couples facing higher tax bills, says law professor Richard L. Kaplan.

“Marital status is implicated in more than 1,100 separate federal provisions, including more than 200 provisions in the tax code alone,” said Kaplan, the Peer and Sarah Pedersen Professor of Law.

The case before the Supreme Court involves a federal estate tax provision that allows a spouse to transfer unlimited amounts of money to the other spouse without owing any estate tax.

“What that means is that Bill Gates could leave his billions to his wife at his death and owe no estate tax at all,” Kaplan said. “But currently, a same-sex spouse cannot use this so-called ‘marital deduction’ because their marriage is not recognized for federal purposes. As a result, a same-sex spouse would be limited to transferring up to the estate tax’s general exemption, which is currently $5.25 million.”

Thus, the real issue is whether the Defense of Marriage Act is constitutional, Kaplan says.

“DOMA defines marriage as between a man and a woman for federal purposes,” he said. “It was enacted in 1996 but the country’s views on same-sex marriage have evolved since then, most recently with Republican Sen. Rob Portman announcing that he now supports the right of gay Americans to marry.”

But DOMA’s constitutionality is not solely an issue for the wealthy, Kaplan says. According to his article “Rethinking Medicare's Payroll Tax After Health Care Reform,” the Affordable Care Act imposes two new taxes on married couples with incomes greater than $250,000 and individuals with income greater than $200,000.

“So, if two married people each earn $150,000, their combined income of $300,000 makes them liable for this extra tax,” he said. “But under current law, a same-sex couple would not owe anything, because unmarried filers have an individual threshold of $200,000 each.”

The new Medicare tax on investment income works the same way, Kaplan says.

“Moreover, each of the new tax parameters in the ‘fiscal cliff’ legislation that was enacted at the beginning of this year creates a penalty on married couples as opposed to couples whose relationship is not recognized by DOMA,” Kaplan said.

“Whether we’re talking about the phase-out of deductions such as home mortgage interest and charitable contributions; the loss of personal exemptions; or the new 39.6 percent tax rate – the results are the same. If the Supreme Court strikes down DOMA, many same-sex couples will face higher taxes.”

Marriage does, however, have significant financial benefits under other federal laws, Kaplan says.

“Social Security provides a spousal benefit equal to half of a worker’s retirement benefit while that worker is alive, and a surviving spouse is entitled to that worker’s full benefit when the worker dies,” he said. “Similarly, Medicare is available to the spouse of a worker enrolled in the program – even if the spouse was never in the compensated workforce.”

Under current law, same-sex partners are not eligible for either Social Security or Medicare benefits because DOMA defines a “spouse” as someone of the opposite gender. But if the court overturns DOMA, married same-sex couples would be eligible for those benefits, Kaplan says.

“The ultimate irony in terms of defending marriage is that a divorced heterosexual spouse is currently entitled to Social Security and Medicare benefits as long as the marriage lasted at least 10 years, while DOMA holds that a same-sex spouse is completely ineligible for such benefits no matter how long they’ve been together,” he said.

Medicaid also includes valuable protections for an applicant’s spouse in terms of how much income and assets can be retained if a person requires nursing home care, Kaplan says.

“Those so-called ‘community spouse’ protections, however, do not apply to same-sex couples under the current law, but would if DOMA is overturned by the court,” he said.

Editor's note: To contact Richard L. Kaplan, call 217-333-2499; email rkaplan@illinois.edu.

The article, “Rethinking Medicare's Payroll Tax After Health Care Reform,” is available online.

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